Natural gas continued to rally, up 6.4% but still short of $3/MMbtu Jan. 25 on the New York market. Crude made small gains in a mixed market, assisted by a bullish inventory report, but couldn’t hold onto an intraday peak above $100/bbl.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “The oil market was boosted by a buoyant product market and the Federal Reserve’s pledge [to continue] its ultra-loose monetary policy over an extended period.” He said oil products again outperformed crude, resulting in firmer product cracks and refining margins, “including margins for simple refineries due to very strong fuel oil crack.” He said, “Term structures in Brent, in particular at the front-end of the curve, rebounded strongly this morning after a recent slide, signaling strong interest in physical buying.”

Zhang said, “We have seen good buying interest for crude from European refiners in recent weeks on much-improved refining margins. Consequently, price differentials for physical cargoes have been strengthening, which has now appeared to have translated into strength in the general oil market. In the short term, we expect a healthy physical market and an improved macro-environment to lead to a reversal of the recent downward trend. That said, we are cautious that the strength in products is unlikely to last as refineries ramp up throughput and warm weather continues to erode demand.”

Fed Chairman Ben Bernanke said Jan. 25 the US Federal Reserve will maintain interest rates below 1% until late 2014 because of the economy's continued weakness. He expects US unemployment to persist near 8.5% through 2012 and may still be at 6.7-7.6% at the close of 2014. Meanwhile, housing remains depressed, and growth in business investment has slowed.

The US Department of Labor reported initial applications for unemployment benefits increased by 21,000 last week to a seasonally adjusted 377,000, up from a near 4-year low the previous week. On Jan. 26, the Department of Commerce reported new home sales were down 2.2% in December to a seasonally adjusted annual pace of 307,000. As a result, 2011 was the worst year for new-home sales in the nearly 50 years the government has been keeping records.

The fact the Fed—rather than the market—has been determining interest rates since the peak of the financial crisis in 2008 indicates to some analysts the failure of Bernanke’s efforts to stimulate the economy. Analysts in the Houston office of Raymond James & Associates Inc. said of Bernanke’s latest statement, “This is what we call financial repression.”

The Fed’s earlier second quantitative easing program (QE2) “led to a $25/bbl increase in oil prices, and the chairman of the Fed insisted yesterday that we should not exclude another trigger of ‘Ben’s Purchasing Power,’” said Olivier Jakob at Petromatrix in Zug, Switzerland. Leaving interest rates unchanged through 2014 “does not mean much in our opinion,” he said. “They can extend that to 2015 or 2020—it does not really matter as no one in the Fed has a good idea of what the second half of 2012 will bring.” He claims the Fed is failing in its mission to foster full employment and is maintaining inflation instead.

“The problem with being gung ho about Bernanke being able to inflate again oil prices is that from current price levels we know that higher levels will only bring more oil demand destruction,” Jakob said.

In other news, Libya reports it is producing 1.3 million b/d of crude, close to prewar production levels, which poses a challenge for other members of the Organization of Petroleum Exporting Countries. “According to OPEC agreements, the organization (i.e. Saudi Arabia) needs to cut production by 1.4 million b/d” to accommodate Libya’s return to markets, Jakob said. “But if it does that, then the strength of the [European Union] embargo [of Iranian crude] will fall apart as some Asian countries will increase their intake of Iranian barrels to replace the Saudi barrels. If Iran cannot push any of its oil that Europe is not taking to the Far East, then Saudi Arabia still needs to cut production by 800,000 b/d. One could of course push for an additional 800,000 b/d cut in Iranian exports, and then Saudi Arabia does not have to cut production. But that will bring Iran much closer to a regional war.”

Meanwhile, some Iranian lawmakers are pushing legislation to stop immediately the country’s crude exports to Europe. “Given that the EU embargo officially starts in July, that would move Iran from being a ‘victim’ to being an aggressor and would also provide justification for the Cooperation Council for the Arab States of the Gulf [also known as the Gulf Cooperation Council (GCC)] countries to replace [Iranian crude in that market],” Jakob said. “Hence we are not sure that Iran has a lot to gain politically from being pro-active on sales restrictions to Europe. Still, the scenario cannot be excluded for the weekend, but then we think that it should be relatively easy for the International Energy Agency to authorize a release of strategic stocks for any country that would be hurt by Iran…stopping its crude shipments to Europe. The IEA cannot authorize a release of strategic stocks for an import embargo that its members are organizing over a 6-month period, but it would be within its duties to authorize a release of strategic stocks for a prompt export embargo organized against its members.”

US inventories

The Energy Information Administration reported Jan. 26 the withdrawal of 192 bcf of natural gas from US underground storage in the week ended Jan. 20. That exceeded Wall Street’s consensus for a 175 bcf reduction, leaving just under 3.1 tcf of working gas in storage. Still, stocks are 531 bcf higher than last year at this time and 547 bcf above the 5-year average.

Raymond James analysts said, “Yesterday's petroleum inventories update was bullish relative to the consensus as a higher-than-expected draw in distillates and an unexpected draw in gasoline largely offset a higher-than-expected build in crude. Combining crude, gasoline, and distillates, inventories increased by 700,000 bbl, compared with the consensus forecast for a build of 3.4 million bbl. At Cushing, Okla., inventories rose for the first time in 6 weeks (up 400,000 bbl to 28.6 million bbl), but are still 9 million bbl below this time last year. Of note, refinery utilization fell to 82.2%—the lowest level since May. Turning to the demand side, total product demand surged 7.5% week-over-week driven by a 7% week-over-week advance in distillate demand, although total product demand is down 6% on a year-to-year basis.”

Energy prices

The March contract for benchmark US sweet, light crudes increased 45¢ to $99.40/bbl Jan. 25 on the New York Mercantile Exchange. The April contract rose 44¢ to $99.73/bbl. On the US spot market, West Texas Intermediate at Cushing climbed 70¢ to $99.40/bbl, back in step with the front-month crude futures price.

Heating oil for February delivery dipped 0.5¢ on NYMEX but closed essentially unchanged at a rounded $3.02/gal. Reformulated stock for oxygenate blending for the same month increased 2.88¢ to $2.83/gal.

The February natural gas contract climbed 17.5¢ to $2.73/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 2.7¢ to $2.63/MMbtu.

In London, the March IPE contract for North Sea Brent lost 22¢ to $109.81/bbl. Gas oil for February was up 50¢ to $942.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes fell 79¢ to $110.70/bbl.